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Dreaming of retirement? Start with a vision

Though it might seem far away, the decisions you make today will impact the quality of your retirement.

Start with a vision
All retirement plans need to start with the vision you have for your future. Ask yourself the following:

  • At what age would I like to retire?
  • Do I plan to travel?
  • Where would I like to live?
  • Will I be making gifts or donations?
  • What kinds of hobbies would I like to participate in?
  • Based on family history, will I live longer or shorter than the average person (average lifespan today is mid-80s)?
  • Also based on family history, can I expect to incur substantial medical or care costs, and at what age?

Quantify your vision
In today’s dollars, meaning that you should strip out any factors of inflation, what does an average year of your ideal retirement cost. Lay out the categories and put a price tag by each:

  • Regular living expenses such as utilities, parking, property taxes, internet and mobile phone, rent (if applicable), home insurance and auto related costs. If you’re a homeowner, remember that you’ll likely be mortgage-free or close to it.
  • Travel expenses such as long or short-term vacation rentals, plane tickets, costs for managing a vacation property, car rentals and travel medical insurance.
  • Gifts of money to people and places such as children, church or charity.
  • Hobbies such as golf, art classes, book clubs, squash clubs and more.
  • Life and medical insurance premiums. Note that as you age, term life policies become very expensive.

What does it all add up to over the course of one year? Now, add another 50 per cent to those costs to factor in inflation. For example, if the year costs $50,000, add another $25,000 for a total of $75,000 to factor in inflation. Last, break that total number down by month.

Convert your costs into a value for your nest egg
We use a rule of thumb to help calculate the size of your nest egg. It’s simply that for every $1,000 per month you need in your retirement, it will require approximately $250,000 of retirement savings. In other words, it takes about $250,000 of invested money (earning regular interest and dividends) to generate $1,000 per month of income in retirement.

If your retirement vision costs $4,000 per month, you’ll need a nest egg of approximately $1,000,000. If your vision is $6,000 per month, your nest egg would need to be $1,500,000. If your vision is $8,000 per month, your nest egg would need to be $2,000,000, and so on.

Where are your retirement savings today versus the size of your nest egg?
Don’t worry if it feels like you’re far from your nest egg goal. That’s what you can focus on next; amping up your savings. Our suggestion is for you to determine what to save each month from now until retirement to close that savings gap. The calculator we recommend you play around with to determine how much to save each month is by Get Smarter About Money. Simply, adjust the monthly savings value and rate of return (which we recommend you keep at 6.5 to 7 per cent), until you reach the desired size of your nest egg.

If you’re not saving enough to reach the desired size of your nest egg, we recommend you take a look at your budget to find ways to save a bit more. Or, consider growing your income through a higher paying job or side hustle.

The last tool we want to share is by Sunlife because it stitches all the pieces of your plan together, including Canada Pension Plan and Old Age Security (if you qualify).